The Case For ‘Progressive Renovation’: Legacy Systems Are Not Equipped for Today’s Multichannel Banking

The emergence of new disruptive market entrants is forcing banks to accelerate their core systems modernization efforts. Growth and product innovation hang in the balance.

Retail banking is in a state of flux. Globally, the industry has faced challenges around customer service, regulation, risk and cost for decades. And now new market entrants are disrupting the marketplace further by bringing specialist practices and modernized systems to what had been a previously concentrated sector.

Traditional players are finding that their legacy IT systems are a real hindrance in the quest to outperform these new rivals. Well-publicized IT glitches such as those experienced by the Royal Bank of Scotland are drawing attention to the very tangible effects of underinvestment in newer technologies, and these kinds of failures could happen at any number of large retail banks globally. If action is not taken now, such issues are likely to become more common, with many major banks running on legacy systems that are decades old and not equipped for the demands of today's 24/7 multichannel banking. The cost of maintaining and updating these legacy systems typically requires an increasing level of IT spending as a percentage of revenue, which means there's subsequently less budget to invest in innovation.

Consequently, rather than supporting banking growth and product innovation, legacy core systems are in fact strangling these efforts. This is why legacy system migration is fundamental to profitable growth and for fueling competitive differentiation, speeding up time to market for new products and ensuring that mission-critical infrastructure components are as efficient as possible, lowering the overall risk to the bank in question.

What's more, sticking to older systems stifles the ability to compete with newer, better-equipped entrants to the market. According to research by analyst firm IDC Financial Insights, 75% of the fastest-growing banks have replaced their core systems. The industry has to ask the question: Can it really afford to wait to renovate the core of its business?

The End Of Customer Loyalty

Financial institutions previously counted on retaining the majority of their clients for life. However, today's customers are looking for better value from their banks, and they're very happy to jump ship to find this, something that will be made easier by new banking legislation.

Customers also are comparing the levels of service offered by banks to their experiences with other companies or brands, and are expecting banks to replicate such events, especially from a technological perspective. This expectation has been heightened by the global recession, which has created a more financially savvy population that's chasing the lowest interest rate on mortgages and loans, and jumping from credit card to credit card in search of interest-free deals.